Friday, March 1, 2013

John Paulson's hedge fund Paulson & Co just filed a 13D with the SEC on shares of MetroPCS (PCS). Per the filing, Paulson owns 9.9% of PCS with 36,300,000 shares. The main purpose of the filing is to say that they sent a letter to PCS saying that they intend to vote against the merger with T-Mobile.

This marks an increase in their position size by around 14% since the end of 2012. The filing was made due to activity on February 28th.

Why Paulson Is Voting Against the Merger's Current Terms

In their SEC filing, Paulson outlines a few reasons as to why they don't like the current deal:

Paulson believes "in the strategic merits of a transaction but are opposed to the current deal terms." They would support the deal if the intercompany debt was reduced along with the interest rate. They also noted they would consider a combination of debt reduction, added cash and/or a higher exchange ratio for PCS shareholders. You can view Paulson's entire thoughts in their SEC filing here.

Hedge fund legend Stanley Druckenmiller (formerly of Duquesne Capital) sat down with Bloomberg TV and says he sees "a storm coming, maybe bigger than the storm we had in 2008, 2010." In this rare interview, he talks about entitlement spending, but also about hedge funds and investing.

He been outspoken on entitlement spending as of late and says there's a demographic bubble and that seniors are essentially stealing from future generations. But below we wanted to highlight his comments on equities, hedge funds, and investing.

Druckenmiller on Hedge Funds, Investing & More

On equities versus bonds: "One of the things that is kinda one of my pet peeves is hearing all these people on TV say, 'Well, you gotta go into equities 'cause they're so cheap relative to bonds and there's no other game in town.' They are cheap relative to bonds. But everything is cheap relative to bonds…So just because equities are cheap relative to bonds doesn't mean their price isn't subsidized. I'm not making a forecast here because the subsidization could go on for a long time. But real estate, gold, equities, they're all priced off of ZIRP, zero interest rates, and they're all subsidized."

On hedge funds: "Oh, I don't know. I think the hedge fund's short-term thinking is just a manifestation of our entire society. Whether it's the fed or whether it's-- the administration or whether it's Congress, no one bothers to think about the long term anymore. And the hedge funds are just one more manifestation of that."

On where to invest now: "That's hard for me to answer. Because I have the luxury of a lot of experience in sitting in front of a screen. And I can go into currency markets where it's at a relative price. So it's the one area where prices aren't subsidized. And I'm arrogant enough to think I can time these things. But I don't really know how to answer that question for public invest-- but let me just say that this idea that you've got go plowing into risk because rates are zero, that they will rue the day one day. The music will stop. And I would probably be invested right now thinking I'm smart enough to know that we're quite away from the music stopping. I don't think Bernanke is about to end these policies for a while. But let's just know what we're dealing with here."

Embedded below is the video of Druckenmiller's interview with Bloomberg TV on entitlements and we'll update with the rest of the interview once it's uploaded:

It's been a while since we've checked in on what the bond king Bill Gross is up to over at PIMCO, so below is his latest investment outlook entitled 'Rational Temperance'.

In it, he touches on how investors are stretching for yield and that "corporate credit and high yield bonds are somewhat exuberantly and irrationally priced. Spreads are tight, corporate profit margins are at record paeks with room to fall, and the economy is still fragile. Still that doesn't mean you should vacate your portfolio of them. It just implies that recent double-digit returns are unlikely to be replicated."

Gross then goes on to say that, "the conclusion would be that where high yield prices go, stock markets follow, or vice versa. Narrow yield spreads in high yield credit markets appear to be accompanied by 'narrow' equity risk premiums in the market for stocks, which is another way of saying that the course of future equity returns may not resemble its recent exuberant past."

Basically, the whole theme of Gross' piece "Rational Temperance" is him saying that investors should lower their return expectations.

Wednesday, February 27, 2013

We're pleased to present another guest post from David Shvartsman over at Finance Trends Matter where he has a lot of great posts about investing/trading process, behavioral finance, and more. You can subscribe to his RSS feed here. Without further ado:

Lessons From Ray Dalio

In our second installment of "Lessons from Hedge Fund Market Wizards", we'll offer up some trading and macroeconomic insights pulled from Jack Schwager's interview with Ray Dalio of Bridgewater Associates.

You've probably heard of Ray Dalio if you have even a cursory knowledge of the hedge fund industry (or the Forbes billionaires list), so let's get right to it. These notes will fill in the rest of the story.

1). Dalio is the founder and former CEO (now "mentor") of Bridgewater Associates, a fund that has returned more money ($50 billion) for investors than any hedge fund in history.

2). Bridgewater still manages to achieve excellent returns on a huge base of capital and has done so over a long period of time. It is among the few hedge funds with a 20-year track record.

3). Dalio believes that mistakes are a good thing, as they provide an opportunity for learning. If he could figure out what he (or someone else) was doing wrong, he could use that as a lesson and learn to be more effective.

4). His life's philosophy and management concepts are set down in a 111 page document called, Principles, which drives the firm's culture and daily operations. Identifying and learning from mistakes is a key theme. It also advocates "radical transparency" within the firm; meetings are taped and employees are encouraged to criticize each other openly.

5). "The type of thinking that is necessary to succeed in the markets is entirely different from the type of thinking required to succeed in school". Ray notes that school education emphasizes instructions, rote learning, and regurgitation. It also teaches students that "mistakes are bad", instead of teaching the importance of learning from mistakes.

6). If you are involved in the markets, you must learn to deal with what you don't know. Anyone involved in markets knows you can never be absolutely confident. You can't approach trading by saying, "I know I'm right on this one." Dalio likes to put his ideas in front of other people so they can shoot them down and tell him where he may be wrong.

7). "The markets teach you that you have to be an independent thinker. And any time you are an independent thinker, there is a reasonable chance you are going to be wrong."

8). Ray learned in his early working years that currency depreciation and money printing are good for stocks. He was surprised to see US stocks rise after Nixon closed the gold exchange window in 1971 (effectively ending the gold standard). The lesson was reinforced when the Fed eased massively in 1982 during the Latin American debt crisis. Stocks rallied, and of course, this marked the beginning of an 18-year bull market.

9). From these earlier experiences, Dalio learned not to trust what policy makers say. He has learned these lessons repeatedly over the years (much like our previous "Market Wizard", Colm O'Shea).

10). Dalio vividly recalls a time when he was nearly ruined trading pork bellies in the early 1970s. He was long at a time when bellies were trading limit down every day. He didn't know when the losses would end, and every morning he'd hear the price board click down 200 points (the daily limit) and stay there. The experience taught him the importance of risk management - "I never wanted to experience that pain again".

11). "In trading you have to be defensive and aggressive at the same time. If you are not aggressive, you're not going to make money, and if you are not defensive, you are not going to keep money.".

12). Bridgewater views diversification and asset correlation differently than most. As Dalio puts it, "People think that a thing called correlation exists. That's wrong.". Instead, he describes a world in which assets behave a certain way in response to environmental determinants. Correlations between say, stocks and bonds, are not static, but are changing in response to "drivers" (catalysts) that can cause assets to move together or inversely.

13). By studying how asset prices move in response to certain drivers, Bridgewater looks to build portfolios of truly uncorrelated assets. By combining assets that have very slight correlations, they are able to diversify among 15 assets (instead of 100 or 1000 more closely linked assets). This helps them cut volatility and greatly improve their return/risk ratio.

14). We are currently in the midst of a "broad global deleveraging" that is negative for growth. Since the United States can print its own money, it will do so to alleviate the pressures of deflation and depression. The effectiveness of quantitative easing will be limited, since owners of bonds purchased by the Fed will use the money to buy similar assets. Dalio elaborates on our future economic course and possible policy approaches to these problems throughout the interview. There's a lot more in Schwager's chapter with Ray Dalio. These notes just scratch the surface on Bridgewater's process and their quest for the Holy Grail of investing. There is also an addendum to the chapter containing Dalio's big picture view of long-term economic cycles and a historical "stage analysis" of the economic rise and fall of nations.

Keith Meister's hedge fund firm Corvex Management recently filed a 13D with the SEC on shares of CommonWealth REIT (CWH) in conjunction with The Related Companies. Per the filing, the funds have revealed a 9.8% ownership stake in CWH with 8,175,001 shares.

Corvex/Related vs. CommonWealth

Corvex outlined its desire to meet with management to address the various opportunities that exist for value creation. They also were appalled that the company hasn't canceled its previously announced underwritten public offering of up to 31,050,000 shares.

Corvex thinks it's "preposterous" that the company would do such a thing
with shares trading at such a large discount to intrinsic value (they
believe it's approximately $40 per share). If the company doesn't announce intent to cancel, Corvex said it's prepared to file litigation.

The funds' 13D filing with the SEC also includes a proposal to take the company over for $25 per share, a 58% premium at the time), but management hasn't responded. As such, Corvex and Related pursued the following:

- Sent additional letters to the board
- Filed a complaint for injunctive and declaratory relief and rescission alleging that CWH breached its fiduciary duty to shareholders

The company said today that they're still going forward with the planned stock offering and has refused to meet with Corvex and Related. So, it will be interesting to see how this one plays out. You can read all the various letters Corvex/Related have sent here.

Corvex & Related's Presentation on CWH

Also embedded below is the presentation on CWH that Corvex & Related attached to their SEC filing:

Per Google Finance, CommonWealth REIT is "a real estate investment trust (REIT). CWH’s primary business is the ownership and operation of real estate, including office and industrial buildings and leased industrial land."

Larry Robbins' hedge fund firm Glenview Capital filed a 13G with the SEC regarding its position in Lifepoint Hospitals (LPNT). Per the filing, Glenview has revealed a 6.79% ownership stake in LPNT with 3,186,280 shares. The filing was made due to portfolio activity on February 14th.

This marks a 32% increase in the amount of shares they own since the end of 2012. Hospitals are a big theme for Robbins, as Glenview's portfolio is revealed in the newly released issue of our Hedge Fund Wisdom newsletter.

Per Google Finance, LifePoint Hospitals "operates general acute care hospitals in non-urban communities in the United States."

Tuesday, February 26, 2013

Just wanted to pass along our discount to the Value Investing Congress in Las Vegas to our readers. This is the first time the Spring event is in Vegas so it should be a great time. You can take advantage of the discount here using code: S13MF6. Hurry because the discount expires in 2 days.

As you can see, there are a TON of speakers so you're bound to hear a lot of differentiated ideas. You can register here with MarketFolly's discount code: S13MF6. This should also be an excellent networking opportunity. And since the conference starts on a Monday, we'd recommend getting to Las Vegas during the weekend as it's a great excuse for a mini vacation.

Monday, February 25, 2013

Viking Global's founder Andreas Halvorsen spoke at the Milken Institute where he shares wisdom on investment process and numerous investing topics. This is a rare opportunity to learn from this hedge fund manager.

On the importance of management teams: He says that good management teams are extremely underappreciated in their ability to take market share, even in low growth environments. He equally believes poor management teams are underappreciated in that they can destroy things quicker than you think.

On short selling: "It's a heartwrenching activity, because you can lose a lot of money doing it." He says you can't short a bunch of underperforming stocks because the risk is too high if you're wrong. And when you are wrong, "you have to get out very quickly, which means you can't have very large positions."

On Viking's approach to investing: They start by looking at industries/sectors and talking to competitors, suppliers, etc. He talks with management to see how they think about the competitive dynamics of the industry. He likes to bet on a management team that has a view of the underlying dynamics similar to what Viking believes.

On hedge fund fees: He said he is fascinated by investors' focus on fees, arguing that they should instead be focusing on the net return after fees. While he is obviously biased here since he runs a hedge fund, he make a very good analogy, comparing fees and returns of funds to expenses and revenues of any business: Index funds all have the same revenues (return) while they have different expenses (fees). Active managers, on the other hand, have both different returns and different fees. So focusing just on the fees doesn't make sense.

On patience: Lastly, Halvorsen also harped on the value of having patience. He says you have to have patience in any business, and hedge funds are no different.

This is a fantastic interview and we highly recommend watching it in its entirety. Embedded below is the video with Viking Global's Andreas Halvorsen:

Market strategist Jeff Saut is out with his weekly market commentary, this time entitled "A Permanent Investment."

He touches on how his mentor once told him to put one quarter of his portfolio in stocks, one quarter in bonds, one quarter in precious metals, and one quarter in farmland. The reasoning was that such a non-correlated asset allocation could preserve and grow capital through various cycles.

Saut also offered a great quote from his father: "If you're going to be wrong, be wrong quickly with a deminimis loss of capital." He then details his thoughts on the current market, which you can read below.

Oaktree Capital's Chairman Howard Marks is out with his latest letter entitled "High Yield Bonds Today." As implied by the title, it deals with the distressed manager's take on an asset class frequently talked about these days:

He notes,

"While we believe spreads are attractive given the risks we see in our portfolios, it is true that there is little room for price upside, making the reward for risk taking limited. In this type of environment, superior returns are more likely to be earned through minimizing mistakes than through stretching for yield. Rather than behaving aggressively, the search for return should involve risk control, caution, discipline and selectivity."

Marks concludes that investors shouldn't sell their bonds and wait for a better time to invest, arguing that market timing is near impossibility (especially in less liquid markets like high yield).

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